WELCOME TO THE CLASS OF HRM
PAY FOR PERFORMANCE &
FINANCIAL INCENTIVES
PROF. HITESHWARI JADEJA
Incentive Pay Terminology
• Pay-for-Performance Plan
 Ties employee’s pay to the employee’s performance
• Variable Pay Plan
 Is an incentive plan that ties a group or team’s pay to some
measure of the firm’s (or the facility’s) overall profitability
 Example: profit-sharing plans
 May include incentive plans for individual employees
Remuneration & Rewards
Financial
DIRECT
(cash)
• Salaries
• Incentives
• Bonuses
Non-Financial
INDIRECT
(benefits)
• Insurance
• Holidays
• Medical and
health
• Child care
• Employee
assistance
JOB
• Interesting
work
• Challenge
• Responsibility
• Recognition
• Advancement
ENVIRONMENT
• Good policies
and practices
• Competent
supervision
• Congenial
co-workers
• Safe and
healthy work
environment
• Fair treatment
Components of Employee Remuneration
Motivation, Performance, and Pay
• Incentives
 Financial rewards paid to workers whose production
exceeds a predetermined standard.
• Frederick Taylor
 Popularized scientific management and the use of
financial incentives in the late 1800s.
How you would apply five motivation theories
in formulating an incentive plan?
Needs and Motivation
• Abraham Maslow’s Hierarchy of Needs
– Five increasingly higher-level needs:
•
physiological (food, water, sex)
•
security (a safe environment)
•
social (relationships with others)
•
self-esteem (a sense of personal worth)
•
self-actualization (becoming the desired self)
– Lower level needs must be satisfied before higher level needs can be
addressed or become of interest to the individual.
Motivation and Incentives
• Herzberg’s Hygiene–Motivator theory
 Hygienes (extrinsic job factors)

Inadequate working conditions, salary, and incentive pay can
cause dissatisfaction and prevent satisfaction.
 Motivators (intrinsic job factors)

Job enrichment (challenging job, feedback, and recognition)
addresses higher-level (achievement, self-actualization) needs.
 The best way to motivate someone is to organize the job
so that doing it helps satisfy the person’s higher-level
needs.
Motivation and Incentives
(continued)
• Demotivators and Edward Deci
– Intrinsically motivated behaviors are motivated by the
underlying need for competence and self-determination.
– Offering an extrinsic reward for an intrinsically-motivated
act can conflict with the acting individual’s internal sense
of responsibility.
– Some behaviors are best motivated by job challenge and
recognition, others by financial rewards.
Motivation and Incentives
(continued)
• Victor Vroom’s Expectancy Theory
– Motivation is a function of:
•
Expectancy: that effort will lead to performance.
•
Instrumentality: the connection between performance and the
appropriate reward.
•
Valence: the value the person places on the reward.
– Motivation = E x I x V
•
If any factor (E, I, or V) is zero, then there is no motivation to
work toward the reward.
•
Employee confidence building and training, accurate appraisals,
and knowledge of workers’ desired rewards can increase
employee motivation.
Motivation and Incentives
(continued)
• Behavior Modification/Reinforcement Theory
– B. F. Skinner’s Principles
•
To understand behavior one must understand the consequences
of that behavior.
•
Behavior that leads to a positive consequence (reward) tends to
be repeated, while behavior that leads to a negative
consequence (punishment) tends not to be repeated.
•
Behavior can be changed by providing the properly scheduled
rewards (or punishments).
How Incentives Sometimes “Work”
PAY FOR PERFORMANCE
Business history is littered with firms that got what
they paid for. Sears had a very clear pay for
performance system in which mechanics were paid
bonuses as a percentage of repair receipts.
Receivables went up, the company was happy
because of higher sales, mechanics got higher pay,
and 41 states indicted Sears for fraud.
Do Incentive Plans Work?
• Successful Plans
 Use important organizational metrics by which to
measure employee performance
 Find the right incentive payout. Payout formulas
should be simple and understandable.
 Are continuously communicated to employees to
establish a clear link between performance and
payout.
 Effectively measure employee output and reward
exceptional employee performance
Do Incentive Plans Work?
• Why Incentive Plans Fail:
 They fail to meet employee expectations for pay
gains.
 There is confusion about incentive payment
calculations due to poor design and implementation
of the plan.
 Employees do not have the capability to change
their performance levels.
 The organization environment does not support
plan.
Employee Opposition to Incentive Plans
•
•
•
•
•
Production standards/goals are set unfairly.
Incentive plans are really “work speedup.”
Incentive plans create competition among workers.
Increased earnings result in tougher standards.
Payout formulas are complex and difficult to
understand.
• Incentive plans cause friction between employees and
management.
Advantages of Incentives
• Motivation to perform better
• Enhanced employee earnings
• Reduced cost of production
• Increased production capacity
• Reduced supervision, reduced accidents, reduced
absenteeism
• Case of Rail Factory, Bangalore
Disadvantages
• Quality is dented
• Introduction of new machines and methods opposed
• Jealousies creep in
• Difficulty in setting rates
• Difficulty in setting standards
• Case of Premier Automobiles, Mumbai
• Ethically incorrect to pay more when normal wages are
already paid
• Standards are perceived to be ceilings
• Incentives only remove dissatisfaction but may not
offer satisfaction
Types of Incentive Plans
Individual
Group/Team
Enterprise/Organization
Piecework
Team
Profit sharing
Bonuses
Gainsharing
• Scanlon plan
• Improshare
• Rucker plan
• Earnings-at-risk
Employee stock
ownership plans
(ESOPs)
Merit pay
Lump sum merit pay
Incentive awards
Sales incentives
Executive compensation
Stock options
Individual Incentive Plans
• Piecework Plans
 The worker is paid a sum (“piece rate”)
for each unit he or she produces.

Straight piecework pays a fixed sum
of money for each unit of production
completed. For example: Ballpark
workers selling peanuts and soda get
$1 for each bag of peanuts and soda
sold.

Standard hour plan pays the worker
a premium equal to the percent by
which his or her performance
exceeds a standard.
Computing the Piece Rate—Another Example
60 minutes (per hour)
12 minutes(standard time per unit)
$12.75 (hourly rate)
5 units (per hour)
= 5 units per hour
= $2.55 per unit
Pros and Cons of Piecework
• Easily understandable, equitable,
and powerful incentives
• Employee resistance to changes
in standards or work processes
affecting output
• Quality/safety problems caused by
an overriding output focus
• Possibility of violating minimum
wage standards
• Employee dissatisfaction when
incentives either cannot be earned
or are withdrawn
Individual Incentive Plans (cont’d)
• Merit Pay
 Is a permanent cumulative salary increase the
firm awards to an individual employee based on
his or her individual performance
 Can detract from performance if awarded across
the board
 Becomes permanent ongoing reward for past
performance
 Generally based on performance appraisal of
worker
11-24
Merit Pay Options
 Give
annual lump-sum merit raises that do not make
the raise part of an employee’s base salary.
 Tie
merit awards to both individual and
organizational performance.
11-25
Merit Incentives
The most widely used plan for
managing individual performance
A reward based on how well a job was done
Traditionally results in a higher base salary
after an annual performance evaluation
Merit increases usually spread evenly
throughout the subsequent year
80 to 90% of firms offer merit raises, but little research
has examined merit pay or its effects
11-26
Percentage of Employees Who Agreed that
Better Performers Get Better Increases
Incentives for Professional Employees
• Professional Employees
 Are those whose work involves the application
of learned knowledge to the solution of the
employer’s problems.

Lawyers, doctors, economists, and engineers
• Possible Incentives
 Bonuses, stock options and grants, profit sharing
 Better vacations, more flexible work hours
 Improved pension plans
 Equipment for home offices
Nonfinancial and Recognition Awards
• Effects of Recognition-Based Awards
 Recognition has a positive impact on
performance, either alone or in conjunction
with financial rewards.
 Day-to-day recognition from supervisors,
peers, and team members is important.
• Ways to Use Recognition
 Social recognition
 Performance-based recognition
 Performance feedback
Social Recognition (non financial) by Gujarat Gas
Company Limited
FIGURE 12–1
The Gujarat Gas
Company Uses
Special Congratulatory
Cards to Recognize
High-performing
Employees
FIGURE 12–1
Social Recognition and Related Positive
Reinforcement Managers Can Use
• Challenging work assignments
• Freedom to choose own work
activity
• Being provided with ample
encouragement
• Being allowed to set own goals
• Having fun built into work
• Compliments
• More of preferred task
• Expression of appreciation in
front of others
• Role as boss’s stand-in when he
or she is away
• Note of thanks
• Role in presentations to top
management
• Employee-of-the-month award
• Job rotation
• Bigger desk
• Encouragement of learning and
continuous improvement
• Bigger office or cubicle
• Special commendation
Combining Financial and Nonfinancial Awards
• Employee recognition
• Gift Certificates
• Special Events
• Cash Rewards
• Email/Print Communication
• Training Programs
• Work life Benefits
• Variable pay
• Group travel
• Individual travel
Non Financial Techniques
Awards & Recognition:
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

Employee of the Month/Quarter/Year
Certificate
Circulars
Public/Staff Recognition
Personalized Gifts
Working Environment:
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•
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•
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Non Political Environment
Good Culture
Transparency in work place
Hygiene & Safety
Effective Grievance Handling
Clear Code of Conduct
Efficient working hours
Freedom of working style
Family Welfare
•
•
•
•
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Child/Elder Care
Fitness Facilities
Family Insurance
Creche Facility
Employee Assistance Programs
Social Gatherings
• Parties
• Picnics
• Games
• Contests
• Festival Celebrations
Paid Leave & Vacations
Incentives for Salespeople
• Salary Plan
 Straight salaries

Best for: prospecting (finding new clients),
account servicing, training customer’s sales force,
or participating in national and local trade shows
• Commission Plan
 Pay is a percentage of sales results.

Keeps sales costs proportionate to sales revenues

May cause a neglect of nonselling duties

Can create wide variation in salesperson’s income

Likelihood of sales success may be linked to
salesperson’s performance

Can increase turnover of salespeople
Incentives for Salespeople (cont’d)
• Combination Plan
 Pay is a combination of salary and
commissions, usually with a sizable
salary component.
 Plan gives salespeople a floor
(safety net) to their earnings.
 Salary component covers company-
specified service activities.
 Plans tend to become complicated,
and misunderstandings can result.
Specialized Commission Plans
• Commission-plus-Drawing-Account Plan
 Commissions are paid but a draw on future
earnings helps the salesperson to get through
low sales periods.
• Commission-plus-Bonus Plan
 Pay is mostly based on commissions.
 Small bonuses (“spiffs”) are paid for directed
activities like selling add-ons or slow-moving
items.
Incentives for Managers and Executives
• Executive Total Reward Package
 Base salary (cash)
 Short-term incentives (bonuses)
 Long-term incentives (e.g., stock options)
Short- and Long-Term Incentives
• Short-Term Incentives: The Annual Bonus
 Plans intended to motivate short-term performance
of managers and tied to company profitability.
 Issues in awarding bonuses
 Eligibility basis
 Fund size basis
 Individual performance award
 Long-term incentives
 Stock options
 Performance shares
 Indexed options
 Premium price options
 Stock appreciation rights
 Perks
 Golden parachutes
Other Types of Long-term Incentive Plans
The “Sweetness” of Executive Perks
Types of Incentive Plans
Individual
Group/Team
Enterprise/Organization
Piecework
Team Incentive Plans
Profit sharing
Bonuses
Gainsharing
• Scanlon plan
• Improshare
• Rucker plan
• Earnings-at-risk
Employee stock
ownership plans
(ESOPs)
Merit pay
Lump sum merit pay
Incentive awards
Sales incentives
Executive compensation
Stock options
Team/Group Incentive Plans
• Team (or Group) Incentive Plans
 Incentives are based on team’s performance.
• How to Design Team Incentives
 Set individual work standards.
 Set work standards for each team member
and then calculate each member’s output.
 Members are paid based on one of three formulas:

All receive the same pay earned by the highest producer.

All receive the same pay earned by the lowest producer.

All receive the same pay equal to the average pay
earned by the group.
Pros and Cons of Team Incentives
• Pros
 Reinforces team planning and problem solving
 Helps ensure collaboration
 Encourages a sense of cooperation
 Encourages rapid training of new members
• Cons
 Pay is not proportionate to an individual’s effort
 Rewards “free riders”
Group Incentive Plans
• Gainsharing Plans
 Programs under which both employees and the
organization share the financial gains according to a
predetermined formula that reflects improved
productivity and profitability.
 A form of group compensation based on group or
plant performance (rather than organization wide
profits) that does not become part of the employee’s
base salary.
Reasons for adopting gainsharing
Implementing a Gainsharing Plan
1. Establish general plan objectives.
2. Choose specific performance measures.
3. Decide on a funding formula.
4. Decide on a method for dividing and distributing
the employees’ share of the gains.
5. Choose the form of payment.
6. Decide how often to pay bonuses.
7. Develop the involvement system.
8. Implement the plan.
Gainsharing Incentive Plans
Scanlon Plan
Rewards come from employee participation in
improving productivity and reducing costs.
Rucker Plan
Shared rewards come from the difference between
labor costs and sales value of production.
Improshare
Gainsharing based on increases in productivity of
the standard hour output of work teams.
Encourages employees to achieve higher output
Earnings-at-risk and quality standards by placing a portion of their
base salary at risk of loss.
The Scanlon Leadership Network
• For more information on the program go to
http://www.scanlon.org/
Gainsharing Plans
Scanlon Plan
Components
Philosophy of
cooperation
Identity
Competence
Involvement system
Benefits sharing formula
Scanlon Plan Suggestion Process
At-Risk Variable Pay Plans
• Put some portion of the
employee’s weekly pay at risk.
 If employees meet or exceed
their goals, they earn incentives.
 If they fail to meet their goals,
they forego some of the pay
they would normally have
earned.
Types of Incentive Plans
Individual
Group/Team
Enterprise/Organization
Piecework
Team
Profit sharing
Bonuses
Gainsharing
• Scanlon plan
• Improshare
• Rucker plan
• Earnings-at-risk
Employee stock
ownership plans
(ESOPs)
Merit pay
Lump sum merit pay
Incentive awards
Sales incentives
Executive compensation
Stock options
Enterprise/Organization Wide Incentive Plans
• Profit Sharing
 Any procedure by which an employer pays, or
makes available to all regular employees, in
addition to their base pay, current or deferred
sums based upon the profits of the enterprise.
 Challenges:

Agreement over the percentages of shared of profits and the
forms of distribution (cash or deferred) of profits between
company and employees

Annual variations and possibility of no payout due to
financial condition of company

Maintaining motivational connection of profit-sharing to
performance of employees
Enterprise Incentive Plans (cont’d)
• Stock Options
 Granting employees the right to purchase a specific
number of shares of the company’s stock at a
guaranteed price (the option price) during a
designated time period.
 The value of an option is subject to stock market
conditions at the time that option is exercised.
Employee Stock Option Plans
What Is a Stock Option?
A stock option gives an employee the right to buy a certain number of shares in the company at a
fixed price for a certain number of years. The price at which the option is provided is called the
“grant” price and is usually the market price at the time the options are granted. Employees who
have been granted stock options hope that the share price will go up and that they will be able to
“cash in” by exercising (purchasing) the stock at the lower grant price and then selling the stock at
the current market price.
How Stock Option Plans Work
Here is an example of a typical employee stock option plan. An employee is granted the option to
purchase 1,000 shares of the company’s stock at the current market price of $5 per share (the
“grant” price). The employee can exercise the option at $5 per share—typically the exercise price
will be equal to the price when the options are granted. Plans allow employees to exercise their
options after a certain number of years or when the company’s stock reaches a certain price. If
the price of the stock increases to $20 per share, for example, the employee may exercise his or
her options to buy 1,000 shares at $5 per share and then sell the stock at the current market price
of $20 per share.
Companies sometimes revalue the price at which the options can be exercised. This may happen,
for example, when a company’s stock price has fallen below the original exercise price.
Companies revalue the exercise price as a way to retain their employees.
Enterprise Incentive Plans (cont’d)
•Employee Stock Ownership Plans (ESOPs)
 Stock plans in which an organization contributes
shares of its stock to an established trust for
the purpose of stock purchases by its
employees.

The employer establishes an ESOP trust that qualifies
as a tax-exempt employee trust under Section 401(a)
of the Internal Revenue Code

Stock bonus plans are funded by direct employer
contributions of its stock or cash to purchase its stock.

Leveraged plans are funded by employer borrowing to
purchase its stock for the ESOP.
Employee Stock Ownership Plans
Rewards and Risks of ESOPS
Advantages
Disadvantages
Retirement benefits
Liquidity and value
Pride of ownership
Single funding basis
Deferred taxes
Not insured
FRINGE BENEFITS
FEATURES OF FRINGE BENEFITS
• An employee enjoys them in addition to the
salary he/she receives.
• They are not given for specific jobs performed
but to make jobs more attractive.
• They are not linked to productivity so do not
reward performance in any way, criteria used is
other than performance.
• They have an indirect impact on workers’
efficiency. If impact is direct, it is not a fringe
benefit.
Types of Fringe Benefits
• Pay for time not worked
• Employee security
• Safety and health
• Welfare and recreation
• Old age and retirement
THANK YOU